As expected, the new budget projections from the Office of Management and Budget show an estimated deficit of $1.58 trillion in the current year (which ends on September 30).
In their coverage of the dueling budget releases, many members of the media are noting that this estimate is almost identical to the $1.59 trillion estimate released by the Congressional Budget Office. Thus, it may appear that OMB and CBO reached similar conclusions about this year’s deficit.
That is not correct.
OMB and CBO use different accounting for a growing part of the budget — the federal take-over of Fannie Mae (FNM) and Freddie Mac (FRE). If you adjust for those accounting differences, an apples-to-apples comparison shows that OMB’s projection of a $1.58 trillion deficit should be compared to a CBO estimate of $1.41 trillion. (For details, see the table on p. 2 and the box on pp. 8-9 of CBO’s report.)
In other words, using identical accounting, CBO is projecting a deficit that is almost $200 billion less than projected by OMB.
Here’s how it works:
Last September, the federal government put Fannie Mae and Freddie Mac into conservatorship, a sort of limbo between being private firms and government agencies. As part of that arrangement, the government committed to making cash injections to prevent the net worth of either firm from becoming negative. As of July, those payments amounted to about $85 billion.
OMB treats those payments as outlays — i.e., government spending — that flow through into the deficit.
CBO, however, believes that the Fannie Mae and Freddie Mac should have been completely consolidated into the government budget when they were taken over. As a result, CBO believes that the budget cost this year is not just the money that’s going out the door, but also the estimated amount of future losses from the government commitments.
CBO estimates that payments to the companies this year will total $112 billion, but the fully consolidated cost is much higher: $291 billion.
CBO’s official estimate of the budget deficit includes that higher $291 billion figure. If you adopt OMB’s accounting convention, however, the appropriate amount to include would be $112 billion, i.e., $179 billion less.
Using OMB accounting, CBO thus estimates that the 2009 budget deficit will be $1.41 trillion, much lower than the $1.58 trillion OMB estimate.
In principle, this disparity could be explained by CBO being too optimistic, OMB being too pessimistic, or something in between. However, my guess is that CBO is closer to right here. There are two reasons for this.
- As I mentioned in a recent post, it makes sense for the Obama administration to let “good news” about the budget come out in two steps. Of course, it’s hard to get too happy about such a gigantic deficit but still it helps the Administration to be able to report that deficit figures are lower than previously predicted. If the final deficit for 2009 comes in closer to the CBO number, the administration will be able to make such a claim again.
- When I was back in government — both at CBO and at CEA — I got the sense that OMB’s mid-session review almost always overstates spending. Not for any political reason, but for a simple human reason: Agencies have plans to do things that involve spending. When OMB asks the agencies how much they intend to spend, the agencies respond with their plans. In practice, however, spending takes time and those plans are often unfulfilled. As a result, year-end spending often falls below what agencies predict during the summer. My guess is that CBO does more to adjust for that than OMB does. Which may explain the disparity in their spending assumptions: OMB projects $3.65 trillion in spending this year while, on an apples-to-apples basis, CBO projects $3.51 trillion.
I bet spending — and therefore the deficit — comes in closer to the CBO figure.